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Auto Leasing: 10 Terms To Help You Understand The Fine Print

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Car DealerVehicle leasing can be a confusing idea—and considering a lease as a sort of long-term rental, as people sometimes do, is the wrong way to think about it.

Fundamentally, the idea behind leasing is that you're paying for the privilege of using, as your own, a vehicle through its first several years. Those first few years are also when vehicles depreciate the most, so you're paying for that depreciation plus a fee to the bank or landing institution, which technically owns the car.

Before you start looking at the fine print for offers and comparing monthly payments and money down, you'll need to understand whether buying or leasing sounds right for you; and if you're still not sure, you should definitely run through the potential numbers to buy versus lease.

There are lots of leasing terms; but we'll save most of them for the finance experts. Here are just a few that will be very helpful in understanding leases and working out the best deals:

Residual value. This is what the lender is projecting that the vehicle will be worth at the end of a set (lease) term. It calculates out to the vehicle's anticipated wholesale value, or what the lender will be able to get for the vehicle if it's put for sale at auction.

Gross capitalized cost. This is the final ‘purchase’ price that you negotiate on the vehicle—plus tax and any other extras that you manage to wrap into the lease.

Adjusted capitalized cost. This is the amount on which lease payments are calculated. Essentially, it's the gross capitalized cost minus the residual value, minus any down payments or rebates.

Mileage allowance. The maximum number of miles you can accrue per year of the lease. Nobody’s going to check your miles at the end of the year, but if you return the vehicle at the end of its lease period with more than the total allotted, expect a hefty penalty.

Acquisition fee. This is an up-front, non-refundable fee charged by the bank to begin a lease. It’s something you can’t negotiate down, and typically $300 to $600 but up to $1,000.

Disposition fee. Another non-refundable fee; this one is typically due at the end of the lease and covers the costs of preparing the vehicle for resale.

Money factor. This is the portion of the total lease cost that includes the interest rate and a padding of profit to lessors.

Security deposit. This is the portion of the money you put down at the beginning of the lease that the lessor keeps if you miss a payment; you should get most or all of it back at the end of the lease if the vehicle is clean, undamaged, and under the mileage allowance.

Lessee. That’s you—the person who leases the vehicle.

Lessor. That’s the company granting the lease—usually a bank, or a captive finance arm of the automaker, but sometimes the dealership itself.

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